When I was little, my family spent some time on public assistance. So I learned at a young age that the best way to lift people out of poverty and into the middle class is to expand economic opportunity. Creating well-paying jobs allows for the social mobility that is often unattainable for families when they are dependent on government assistance. People thrive with the dignity of self-reliance.
The US tax code works against this principle.
Instead of rewarding hard work and entrepreneurship, the tax code rewards lobbying and “rent-seeking.” Instead of instilling a sense of fair play, it is justifiably viewed by tens of millions of Americans as rigged against them. This has led to a majority of citizens favoring major changes to tax laws.
The tax code is built upon bad fiscal policy, which is, needless to say, bad for the nation. We have to find a better way to operate.
On Thursday, the House passed a tax reform bill, and the Senate has advanced its own tax proposal, both of which would be a big step toward remedying some of these ills.
In different ways, the House and Senate bills would cut back on the deductibility of state and local taxes (SALT). This provision has generated some strong pushback, but let’s consider what this means for a minute.
The deduction for state and local taxes is an advantage for a subset of a subset. According to 2014 data, only about 30% of taxpayers, generally wealthier ones, itemize their deductions. And even for that minority the SALT deduction’s value is uneven, since residents of high-tax states like California and New York get a bigger deduction on their federal taxes than those living in low-tax states. This effectively means high tax states are taking a larger cut from the federal government than low-tax states.
How is it fair that residents of low-tax states are left subsidizing the bad choices made by lawmakers in other states? Why should two people with similar incomes and similar life situations who live perhaps miles apart near a state line be treated so differently?
The answer, of course, is politics.
At roughly 4 million words, the tax code is all but undecipherable. According to the Small Business Administration, many small business owners who do their own taxes spend more than 40 hours every year preparing and filing their federal tax returns.
Many small businesses hire somebody to do it, another cost burden. The National Taxpayer Advocate, an independent organization within the IRS, found that complying with the code costs American taxpayers $195 billion a year. Small businesses alone spend between $15 and $16 billion a year on compliance costs, according to the National Federation of Independent Business.
Talk about immoral. That’s time parents could be spending with their kids. That’s money small business owners could be investing in their stores, their employees, their futures.
Then there’s the unfairness of it.
Big businesses have even bigger challenges, but they can afford to hire lawyers and accountants to navigate the tax code (and lobbyists to help get legislation written in their favor). The tax code is a treasure trove of subsidies, handouts and breaks for those well-connected enough to get them. The Congressional Budget Office estimates that tax expenditures, including preferential tax rates, credits, special exclusions, exemptions, and deductions, will exceed $1.5 trillion this year alone.
What we’re left with is a two-tiered system in which some are the movers and shakers, and the rest of us are just left shaking with rage at the injustice of it all.
Will either the Senate or House tax reform measures fix all these problems? Of course not. What legislation ever solved a problem completely? Deals are cut, compromises are necessary, politics continues to be played.
But both bills include provisions that constitute an improvement over the status quo.
Lower rates on individuals mean more money in the pockets of taxpayers, and corporate rate cuts benefit everybody. These reforms should not be viewed as “tax cuts for the rich.” Instead, they are tax cuts that enrich us all.
These bills aren’t perfect. But lawmakers are making progress toward overhauling a system defined by this sorry sentiment: 72% of Americans polled on Election Day 2016 said “the American economy is rigged to advantage the rich and powerful.”
Bitter partisanship should not preclude Washington from doing the right thing and fixing the unfairness that permeates the tax code. It’s time to move away from a convoluted and arcane system that discourages economic growth and baffles most of us, toward a simpler, fairer system that creates opportunity for all.
